Real Estate RI: To Rent or To Buy

In the 33 years I’ve been selling real estate, the question I get asked most often is, “Is now a good time to buy?” The question they are really asking is, “Should I buy or rent?” Because other than living with Mom and Dad, those are your two choices.

Unless you are living with your parents, you have to pay something for housing. So if the mortgage is cheaper than the rent in your area, this difference could offset the short-term costs of ownership, especially since the cost of rents have increased almost 5% in the last three years according, to the department of numbers. See, there are costs associated with buying and selling that you don’t have with renting. When you purchase, you have closing costs that are typically between $5,000 and $6,000, and when you sell, you have real estate commissions, RI taxes and other closing costs that total between 7% and 8% of the sale price. It typically takes two to three years to recoup this money in the current escalating market, so if you plan to move every couple of years then renting makes more sense, however, if you plan on staying put, now is the time to buy.

This would not have been true from 2006 through 2009 when the market was declining. Buying a house then was like catching a falling knife — you’re more than likely going to be cut. The problem always is timing the market, and there are two basic factors that affect home prices: interest rates and the availability of money as well as the availability of sellable inventory. Yes, we’re back to economics 101: supply and demand. One could say that there are other factors involved, such as the economy, population counts and government intervention like the 2009 stimulus (ironically that stimulus resulted in an increase in units sold but not in prices).

Let’s look at interest rates. In September 1983 when I started selling, the interest rates were 13.73%. That means that on a $250,000 30-year mortgage, the principle and interest payment would have been $2,908 compared to $1,114 at today’s amazingly low 3.44%. That is 62% lower, keeping in mind that since the mid ’90s, rates have been steadily falling. Rates will eventually go up; that’s the bad news. The good news is that the sky is not falling and an increase of even 1% — from 3.44% to 4.44% — would only increase a buyer’s payment on that same $250,000 mortgage by $113, which is slightly more than 10%. This would not be enough to stifle the steady market growth we have seen since 2011 in both prices and units.

To put this in perspective, in 2011 the average sale price in RI was $242,188 and there were 9,975 units sold. In 2016 the average sale price is $283,448 and we are on track to sell 15,270 units, according to statewide MLS and CoreLogic data sources. This represents a 16.9% increase in the average price and a more than 50% increase in the number of units sold. This has caused a decrease in the supply of inventory from a high in 2008 of 11 months on the market to a current low of 3 months — 6 months of inventory is the tipping point between a buyer’s and seller’s market.

If you have thought about buying and you plan to stay in the property for at least a couple of years, then you really should buy. According to the St. Louis Federal reserve statistical office, the house price index has been on the rise since 2011 and historically has always surpassed the previous housing boom. With the last peak putting the index at 600 and RI currently at 425, there is still room for prices to go up.